Under a perpetual inventory system, how are fixed costs expressed on a per unit basis affected as production volume increases?

• A. They decrease as production volume increases.
• B. They remain constant regardless of production volume.
• C. They increase as production volume increases.
• D. They fluctuate unpredictably with production volume.

Answer: (A)

Verified step by step guidance

1. Understand the concept of fixed costs: Fixed costs are expenses that do not change with the level of production or sales. Examples include rent, salaries, and insurance.
2. Recognize the relationship between fixed costs and production volume: Fixed costs remain constant in total, regardless of the number of units produced.
3. Analyze how fixed costs are expressed on a per-unit basis: To calculate fixed costs per unit, divide the total fixed costs by the number of units produced. This can be expressed mathematically as: $\frac{\mathrm{Total\; Fixed\; Costs}}{\mathrm{Number\; of\; Units\; Produced}}$
4. Consider the impact of increasing production volume: As the number of units produced increases, the denominator in the formula above becomes larger, causing the fixed cost per unit to decrease.
5. Conclude that fixed costs per unit decrease as production volume increases, while the total fixed costs remain constant.